I was lecturing at a training session on `trade risk management'. For the sake of the training, we all had to contain our presentation and discussions with regard to risk associated with 'letters of credit, advising, negotiation, shipping document, bill of exchange, payment, bill of entry, pricing, exchange rate and other trade products'. In the question and answer session a lady bank executive from a second generation private commercial bank asked me a question- 'sir, could an independent central bank help avoid the Hallmark scam'?

Considering the recent 'hue and cry' raised over the central bank's independence or autonomy, I wanted to avoid the answer. But the other attendees joined the lady and the voice seemed to have become louder. Though I always felt that an independent, strong and effective central bank could play a significant role in improving the overall banking environment in the country, I don't think that central bank autonomy had anything to do with 'Hall-Mark scam'.

We unfortunately had to swallow a lot of `knowledge donations' re: the possible causes of 'Hall-Mark episode' as explained by people not having even an iota of knowledge in international trade, risk analysis, risk management, bank limit, audit, governance, information technology in banking or financial institutions risk management. Any humble student of banking should be able to say; Hall-Mark is a glaring example of - 1) control lapses in state-owned commercial banks- the head office didn't have enough control on the branches and didn't have adequate knowledge about what was really happening in the branches, 2) non-compliance with the procedures of 'accommodation bill' and bill discounting under bank limit- nobody was keeping track of transaction happening within two group entities under Hall-Mark in the same branch of a state-owned bank and continuous diversion of funds to other banks , 3) local banks are happily taking exposures under bank limit on another bank without analyzing the underlying fundamentals, strengths or weaknesses of the respective banks , nobody in the bank branches as well as head office were monitoring the outstanding against the bank limits and some people even thought that they could take any exposures or risks on Sonali Bank, which is a government of Bangladesh undertaking 4) documentation as well as validation process in `local or domestic trade' is very weak in Bangladesh- in many cases letters of credit is established after the goods have been shipped and only in order to formalize the payment process or in most cases, 'delivery receipts' can't be verified 5) banks are increasingly becoming subservient or captive to the big business groups- in most occasions drawings by the large groups are heavily in excess of their overall sales numbers or turnover and, most importantly, 6) banks are not in command of the required and relevant information due to absence of right information technology platform or weak management information system (MIS) or inappropriate record keeping process. While respective banks' lending capability is constrained by a percentage of their capital and reserve, the large clients can enjoy a 'loan bonanza' without any relevance to their capital and reserve.

Added to these were of course the lack of accountability in the state-owned banks, politicization of the board and, may be, the entire banking system and weak or no human resource development practices and performance management culture.

Strong control over the CEO and board appointment process might have helped the central bank to have louder voice on timely submission of the returns, dictate a proper audit plan on the state owned banks or even impose a better asset-liability management plan. But I don't think it would have helped a bank like Sonali to avoid 'Hall-Mark' type scam. We need a better risk appraisal culture, data processing, mining and analyzing capability with well-trained human resources to detect or protect fraud or risk managers to identify and mitigate transaction risks in order to make sure we do not encounter surprises like that of Hall-Mark.

Who does not want the central bank to enjoy autonomy to formulate an effective monetary policy or even in a transition economy like Bangladesh to achieve respectable supervisory strength to protect depositor's interest? Having said that, I would rather put my money more on the banks to improve their human resources, rewrite their transaction or audit manuals or check lists, ensure establishment of a proper risk appraisal and approval process with an effective information technology delivery platform and, more importantly, see to that the internal control and compliance process is working.

I would also humbly remind our friends in the central bank that nobody is telling them to increase their number of offices or recruit 10,000- odd auditors or inspectors to ensure supervisory excellence in the commercial banks, be those government-owned or private commercial ones. We only want them to improve their 'offsite supervision', increase the use of technology in bank supervision manifold and, more importantly, their senior officials to start learning and appreciating the 'practical way' of handling international trade transactions, large loans or treasury management. But one important thing needs to be remembered by all concerned - 'no matter how much we improve our systems, process or platform, nothing can stop fraud and forgery in banks, unless we can recruit better people, capable but non-controversial people in senior positions in regulatory, supervisory and business development affairs.

News: The Daily Financial Express/Bangladesh/20-Nov-12